Tuesday, October 21, 2014

Pimco: Bogle is Wrong

From LearnBonds:
Facing outflows amid the much publicised departure of longtime CEO Bill Gross and an increasing trend toward passive fund management. Pimco has come out fighting, saying some fixed income managers can meaningfully add to returns.
Pimco pensions strategist James Moore defended active bond management, in a piece posted on the firms website. In which he refutes comments made by the legendary advocate of index-based investing, Jack Bogle.
Moore was referring to a recent television appearance by Bogle in which he said the arguments for index investing hold just as much for bonds as stocks.
Bogle’s argument is based on some basic math: In sum, the performance of all investors aggregates to the performance of the markets. For every winner, there must be some loser who is subsidizing the winner’s gains. Throw in fees, and the average net return above the market for active investors is negative.
“The key question for investors is, ‘Do I have a strong reason to believe my active managers will add value in excess of their fees’,” asked Mr. Moore. “I would not argue that all do or even that a majority do, but those manager who understand and exploit the five reasons I list, plus a host of others, stand a good chance.”
Moore offered a series of reasons why “the common wisdom” about the superiority of so-called passive investing might not extend to bonds. Here are five important ones:
1. A significant fraction of investors in fixed income markets have primary objectives that differ from maximizing mark-to-market total returns.
2. Unlike equity indexes, where the market determines the weights, in bond indexes issuers principally determine the weights.
3. The new issuance market is much more important for bonds than equities.
4. Most bond trading is done via over-the-counter transactions and not on exchanges.
5. Individual bond returns are highly skewed versus stock returns, which are more symmetric.
You can read Moore’s full article here.
The rest of LearnBond's linkfest